Melamine in Milk - Update Tainted Chinese Dairy Products

China Current Affairs Report 10 October 2008 Note: This is an update of the original report that was published on 22 September 2008

Emerging Strategy Limited

Contact: info@emerging-strategy.com

+86 (21) 6191 1101 www.emerging-strategy.com

©Emerging Strategy Limited (www.emerging-strategy.com)

Emerging Strategy

Limited

Melamine in Milk: Tainted Chinese Dairy Products Current Affairs Report

22 September 2008

Background In mid-September, about 1,700 Chinese infants were diagnosed with kidney stones and other renal disease. A government investigation determined the cause was melamine contamination in milk formula manufactured by the Sanlu Group, a state-owned company and one of the top domestic brands. Melamine is normally used in plastics and fertilizers, but was used by Sanlu to boost watered-down milk's apparent protein content. It appeared unlikely that the problem was limited to one company, so the General Administration of Quality Supervision, Inspection and Quarantine tested samples of milk formula produced by other companies. The results showed the widespread presence of Melamine in most major Chinese brands. Additional testing of liquid milk and milk products such as yogurt showed that infants and toddlers were not the only victims, and that adults have also been consuming Melamine-laced products manufactured by the top Chinese dairy companies including the 2008 Olympics Sponsor Yili Industrial Group. No products involving foreign brands – whether manufactured in China or imported – have yet tested positive for Melamine. Once a growth success story, the Chinese dairy industry is in disarray and China is once again in the news for the wrong reasons. To date nearly 13,000children have been hospitalized. It is important to note that breast-feeding rates are low in China, and formula milk is used widely, at all socio-economic levels of society. Domestic Brands Involved

According to test results posted as of 19th September, the government has tested 491 batches of baby milk formula from 109 brands. The results show that 69 batches of milk formula from 22 brands contain melamine

Sanlu’s products that tested positive are the most toxic, containing an average of 2564 mg/kg, which is sufficient to cause renal disease amongst children

Sanlu is a state-owned company founded in 1956, and a minority stake is owned by Fonterra, a

New Zealand company

As the largest Chinese milk formula manufacturer, Sanlu had about 18% of the total market share

before the contamination news broke

Its products dominated the medium and lower-end market – thus its victims are typically those

children whose families are unlikely to be able to afford high medical bills

Products from another 21 brands were found to contain melamine in quantities between 0.09mg / kg to 619mg / kg and many famous brands such as Yili, Saint, Mengniu, and Yashili etc., are involved

It is estimated that the total market share of these brands before this crisis was 50% - 60%

The government also tested liquid milk samples from 5 major brands: Mengniu, Yili, Guangming, Sanyuan and Nestle, which together account for a 70% share of the liquid milk and dairy products market

24 batches of liquid milk from Mengniu, Yili, and Guangming were found to contain melamine in

quantities of 0.765mg / kg to 8.4mg / kg

According to the results posted as of 30th September, the government has tested 265 batches of other

milk products from 154 companies

The results show that 31 batches of products from 20 companies contain melamine

All Sanlu products were found to contain melamine between 1.3mg/kg to 6196mg/kg

Products of localized brands such as Shijiazhuang Baocheng and Tangshan Longyuan also contain

very high melamine, up to 5600 mg/kg

A few products of famous brands such as Mengniu and Yili were also found to contain melamine

of between 6mg/kg to 25mg/kg

Since 24th September, the government has test 212 batches of milk powders and 2093 batches of milk

©Emerging Strategy Limited (www.emerging-strategy.com)

Emerging Strategy

Limited which produced after 14th September. The results show that none of the products contained

Melamine. Foreign Brands Involved All the milk products of foreign brands are free of melamine according to tests conducted so far by the

Chinese (PRC) government However, some products by these brands were found to contain minor traces of melamine

according to tests conducted in Hong Kong, Singapore and Korea – On 22nd September, a Nestle dairy product produced in China tested positive for melamine

in a test by an institution in Hong Kong, but this has not been confirmed by Nestle or the Hong Kong government

– In 24th September, a Nestle pure milk product produced in Qingdao tested positive for melamine in a test by the Hong Kong government, and Nestle subsequently recalled this product from Hong Kong

– A Nestle dairy product tested positive for very minor melamine traces in a test by the Taiwan government, and subsequently was removed from the shelves of supermarkets and shops in Taiwan

These products are not mentioned on ‘the list’ in China therefore the implied government stand is that all foreign branded products and still considered to be safe

– Therefore, these products are still available on the shelves in Mainland China

Downstream Products and Brands Involved Test of Chinese-made downstream dairy products such as chocolate, cake, cream, biscuits, candies etc.

in other countries have indicated that these are also contaminated These downstream products include foreign brands as well as well-known Chinese confectionary

brands No test results for such downstream products have been released in China by the government or

any other organization A famous candy brand- Super Rabbit – was tested to contain melamine in both Singapore and

Hong Kong, and was subsequently banned in those two markets and a number of others around the world

Chinese-made foreign branded products found to contain Melamine in tests in other countries include Lotte cakes and biscuits , Cadbury cookies and chocolate and Heinz Formula Cereal (tested positive in Hong Kong and Korea)

– Lotte recalled the relevant products in Korea and suspended biscuit production in China Other involved brands include Lipton of Unilever, Pocky Men of Ezaki Glico and Nabisco of Kraft

Government Reaction According to media reports, Sanlu and the Chinese government were slow to move and did so only

after the New Zealand government went public

Sanlu officials were aware of this problem for well over a month

Fonterra, a New Zealand company, has a ~43% stake in Sanlu and three board seats, and had been

trying to get Sanlu and local government officials to take action without success

The government has arrested 22 executives of the Sanlu Group

It is likely that the government will make a show out of prosecuting and possibly executing some

officials to make a point, as it did after a similar product safety crisis in 2007

Sanlu and 46 other dairy companies have had their exemption from government food safety inspections cancelled

Sanlu’s infant formula had been certified as an "inspection-exempt product" for three years (since

December 2005) by the General Administration for Quality Supervision, Inspection, and

Quarantine (AQSIQ)

Such certification meant "the products are exempted from quality monitoring and inspection

conducted by the government," and that "internal inspection should be reinforced"

The designation “national famous brand” has been revoked from Sanlu, Mengniu, Yili and

Guangming

The government has announced it will monitor the price of milk formula closely, and intervene if

©Emerging Strategy Limited (www.emerging-strategy.com)

Emerging Strategy

Limited prices rise quickly due to the expected shortage in the market once all the affected brands and products have been removed from shelves

Since 12th, September, the government is providing free testing and treatment for babies

Adults do not receive the same benefits Market Reaction The Sanlu Group is likely to collapse because of this scandal and recent reports suggest a takeover of

Sanlu by Beijing Sanyuan (see below)

Reports from earlier this year suggested that Sanlu planned an IPO in the second half of 2008 –

this is now impossible

Sanlu’s production has been shut down and its key executives have been arrested

Since most major Chinese brands are involved, many second tier brands not involved in the crisis have

gained market share very rapidly

Beijing Sanyuan benefited most from this crisis: it s brand was citied as the safest Chinese brand

and sales increased by 300%

With the help and coordination of the Central Government, Beijing Sanyuan will acquire Sanlu

and turn itself from a mid-sized local company into one of the largest dairy companies in China

– The acquisition is still under negotiation and further details are unavailable

– Emerging Strategy predicts a deal that would remove any transfer of liability for Sanlu’s

actions from the new owners, limiting prosecution to individual employees of Sanlu rather

than the company as a whole

Other relevant brands apologized officially, recalled all products that tested for Melamine, and committed to compensate consumers for problems caused by these products

Besides the free testing and treatment offered to infants by the government, no details of any

compensation or damages offered to consumers has emerged

In the immediate aftermath of the crisis, major Chinese dairy brands suffered, and it was estimated that ~80% of Chinese brand milk formula had left the shelves of most supermarket chains

As a result, many dairy farmers threw away fresh milk since their customers, the dairy companies,

were in turmoil (e.g., dairy farmers in Hebei province, where Sanlu Group is based, threw away

6000 tons of fresh milk between 14th -16th September).

– Domestic consumers lost confidence in Chinese dairy brands and temporarily suspended all

non-essential dairy-related purchases

However, recent visits by Emerging Strategy researchers to supermarkets in Shanghai suggest that

things are returning to normal

– The government and dairy companies are interested in de-emphasizing the crisis and

putting it behind them as soon as possible, hence all products produced after 14th

September are deemed safe

– Dairy aisles were packed with products from all brands (except Sanlu) and consumers

appeared to be buying all kinds of fresh and downstream dairy products

– By not publishing lists of contaminated downstream products, the Chinese government is

hoping to limit the fallout to ‘a few bad apples’ without tackling the larger issue of lose

quality controls and a hands-off attitude towards large domestic companies that

contributed to the scale of the crisis in the first place

Joint venture plans between foreign and Chinese dairy firms, and perhaps more broadly in the food and beverages sector may be affected

Foreign dairy brands that are ‘clean’ are unlikely to associate themselves with tainted Chinese

brands for the foreseeable future

New food / beverages sector JVs in which the foreign partner has a large but minority stake, and

exercises little control over management and safety decisions (e.g., Fonterra Group’s relationship

with Sanlu) will become highly unlikely

Since none of the foreign brands in China (have yet) tested positive for Melamine, this is a major opportunity for them to enhance their public perception and gain market share at the expense of domestic brands

©Emerging Strategy Limited (www.emerging-strategy.com)

Emerging Strategy

Limited Foreign brands such as Nestle have promised not to increase prices at this time, which will help

them strengthen their position in the high-end market, and gives them an opening to expand into

the middle market as well

Lack of Consumer Litigation

Lack of legal consciousness and an incomplete legal system means individual lawsuits due to harmful

products are rare

There is only one lawsuit against Sanlu so far- if this situation occurred in most other countries,

there would have been thousands of lawsuits already filed

It is possible that many consumers have been placated by the government offer of free medical

treatment for infants, and will therefore not bother to take any action

Most of the harmful products were recalled by Sanlu, so not there is little evidence of specific

tainted products that is still in the hands of consumers

Since Sanlu is a state-owned company, the government is likely to control this crisis with

administrative steps rather than conducting, encouraging or allowing actions of a legal nature

The courts are waiting for the official compensation plan prepared by the government, and they

will not accept lawsuits filed until the government has released their plan

Lawyers are facing pressure from the government, and according to some reports it has been

‘suggested’ to them that they only provide legal advice instead of filing any litigation

©Emerging Strategy Limited (www.emerging-strategy.com)

Emerging Strategy

Limited

Milk and Yogurt with Melamine

Brand Product Name Packaging Distinguishing Logo / Sample

Product Image

Production Date of Test

Sample

Melamine

(mg/kg）

Meng Niu

Wulnut Milk 200ml/bag

09-10-2008 0.77

Low-Fat and Calcium-Rich Milk

250ml/box 08-07-2008 0.80

Sterile Whole Milk 250ml/box 09-01-2008 1.00

Low-Fat and Calcium-Rich Milk

250ml/box 08-01-2008 1.50

Breakfast Milk 250ml/bag 08-14-2008 1.90

Breakfast Milk 250ml/box 07-26-2008 2.57

Miaodian 250ml/box 07-28-2008 3.17

Xylitol Yogurt 2kg/bottle 08-06-2008 3.52

Low-Fat and Calcium-Rich Milk

243ml(250g)/bag 09-08-2008 4.20

Yogurt with Whole Fruit

160g/box 09-03-2008 6.80

Yili

Yogurt with Mango and Yellow Peach

125g/box

09-07-2008 0.69

Yogurt with PawPaw and Orange

125g/bottle 09-03-2008 1.02

Pure Milk 220ml/bag 09-13-2008 2.20

De-fatted Milk 250ml/box 08-20-2008 2.90

Pure Milk 242ml/bag 09-06-2008 8.00

Low-Fat and Calcium-Rich Milk

250ml/box 08-19-2008 8.40

Guangming

Original Flavor Yogurt

180g/bag

09-12-2008 0.60

Original Flavor Yogurt

180g/box 09-13-2008 3.41

Original Flavor Yogurt

100g/cup 09-10-2008 3.50

Yogurt with Strawberry

450g/box 09-02-2008 4.80

Probiotics & Cream

190g/bottle 09-08-2008 5.65

Cream & Yogurt (Original Flavor)

580g/bottle 09-09-2008 8.60

From official information available as of Friday 19th September 2008 http://www.aqsiq.gov.cn/zjxw/zjxw/zjftpxw/200809/t20080919_90325.htm

©Emerging Strategy Limited (www.emerging-strategy.com)

Emerging Strategy

Limited

Baby Milk Formula with Melamine

Brand Product Name Packaging Distinguishing Logo / Sample

Product Image

Production Date of Test

Sample

Melamine

(mg/kg）

Sanlu

Sanlu Huiyou II Formula Powder for Toddler 400g/bag

07/02/08 2563.00

Sanlu Huiyou I Formula Powder 400g/bag 05/29/08 1197.00

Sanlu Huiyou III Formula Powder 400g/bag 06/01/08 955.00

Sanlu Beibei Infant Formula Powder 400g/bag 01/30/08 420.82

Sanlu Beibei Infant

Formula Powder（0-

6 months） 400g/bag 162.00

Sanlu U+ Infant Formula Powder 400g/bag 08/07/08 1.40

Sanlu Formula Powder for Toddler 400g/bag 08/26/08 0.70

Panda Kebao

Infant Growth Formula Powder III (Youkang) 900g/can

Panda Kebao image unavailable

08/30/08 619.00

Infant Growth Formula Powder III (Youkang) 400g/bag 08/26/08 534.00

Infant Growth Formula Powder III (Youkang) 900g/can 08/27/08 523.00

Saint

Youcong Infant Formula Powder(0-6 months) 400g/bag

06-19-08 150.00

Youcong Infant Formula Powder 400g/bag 06/20/08 78.81

Youcong Toddler Formula Powder 400g/bag 06/22/08 58.77

Toddler Formula Powder 400g/bag 05/15/08 50.20

Youcong Infant Formula Powder(0-6 months) 400g/bag 03/21/08 41.00

Youcong Infant Growth Formula Powder 400g/bag 07/23/08 19.47

Youcong Toddler Formula Powder 400g/bag 07/24/08 15.10

From official information available as of Tuesday 16th September

http://www.aqsiq.gov.cn/ztlm/nf/qwfb/200809/P020080916818021945309.doc 2008

©Emerging Strategy Limited (www.emerging-strategy.com)

Emerging Strategy

Limited Youcong Infant Growth Formula Powder

（30g/bag×10

bags）/box 02/17/08 5.40

Brand Product Name Packaging Distinguishing Logo / Sample

Product Image

Production Date of Test

Sample

Melamine

(mg/kg）

Gucheng

Youfang Infant Growth Powder (0-6 months) 400g/bag

02/01/08 141.60

Youfang Infant Golden Package Growth Powder (0-6 months) 400g/bag 07/03/08 36.00

Baby Growth Golden Package Healthy Formula (1-3 years old) 400g/bag 08/01/08 33.10

Youfang Infant Growth Powder (6-12 months) 400g/bag 01/13/08 10.10

Yingxiong

Toddler Formula Powder 380g/bag

Yingxiong image unavailable 09/08/08 98.60

Infant Formula Powder II 380g/bag 09/05/08 48.50

Huimin Infant Formula Powder II 400g/bag

09/08/08 79.17

Mengniu

Infant Formula Powder (1-3 years old) 400g/bag

01/09/08 68.20

Infant Formula Powder(6 month to 1 year old infant) 400g/bag 01/14/08 40.90

Infant Formula Powder (0-6 months) 400g/bag 01/08/08 11.10

Special Formula for Children before school years 6×900grams 08/27/08 0.91

©Emerging Strategy Limited (www.emerging-strategy.com)

Emerging Strategy

Limited

Brand Product Name Packaging Distinguishing Logo / Sample

Product Image

Production Date of Test

Sample

Melamine

(mg/kg）

Yashili

Golden Stage Infant Formula Powder (1-3 years old) 400g/bag

08-27-08 56.00

Golden Stage Infant Formula Powder II (0-6 months) 400g/bag 06-27-08 50.60

Golden Stage Infant Formula Powder II (6 months to 1 years old) 400g/bag 07-28-08 43.00

Golden Stage Infant Formula Powder II 400g/bottle 06-17-08 31.65

Golden Stage Infant Formula Powder 400g/bag 08/01/08 23.24

Golden Stage Toddler Formula Powder 400g/bag 08/16/08 20.50

Yashili Infant Formula Powder II(0-6 months) 400g/bag 05-15-08 35.70

Infant Formula Powder II 25kg/bag 09/01/08 26.30

Yashili Toddler Formula Powder 25kg/bag 09/03/08 14.30

Ginbis

Infant Formula Powder III 900g/bottle

04/08/08 18.00

Todder Formula Powder II 900g/bottle 09/04/08 3.00

Scient

Golden Package Growing Infant Milk Powder (0-6 months) 400g/box

07-23-08 17.00

Infant Milk Powder I 900g×6bottles 07/03/08 12.50

Growing Infant Milk Powder 401g/bag 08/19/08 7.90

Infant Milk Powder I 900g×6bottles 07/14/08 6.20

©Emerging Strategy Limited (www.emerging-strategy.com)

Emerging Strategy

Limited

Brand Product Name Packaging Distinguishing Logo / Sample

Product Image

Production Date of Test

Sample

Melamine

(mg/kg）

Yili Yili Child Milk Powder (1-3 years old)

400g/bag

07-16-08 12.00

Ausmeadow

Anbaby Formula Powder (1-3 years old) 1000g/bottle

09/09/08 10.70

Aner Infant Formula (1-3 years old) 400g/bag 09/09/08 10.40

Anbaby Infant Formula(3-4 months) 1000g/bottle 09/09/08 10.30

Aner Infant Formula

II（7－12 months） 400g/bag 09/04/08 10.00

Anbaby Infant

Formula（0－6

months） 1000g/bottle 09/01/08 9.30

Aner Infant Formula

（0－6 months） 400g/bag 08/21/08 6.30

Leilei

Infant Formula（6-

12 months） 400g/bag

Leilei image unavailable

06/03/08 1.20

Infant Formula III

（1-3 years old） 400g/bag 06/04/08 1.10

Infant Formula I（0-

6 months） 400g/bag 06/08/08 0.53

©Emerging Strategy Limited (www.emerging-strategy.com)

Emerging Strategy

Limited

Children’s and Adults’ Supplemental Milk Powder with Melamine

Brand Product Name Packaging Distinguishing Logo / Sample

Product Image

Production Date of Test

Sample

Melamine

(mg/kg）

Sanlu

Formula with Rich Iron and Zinc

400g/bag

04-03-2008 6196.61

Formula with Rich Iron and Zinc

400g/bag 01-13-2008 4082.64

Youth Calcium Rich Formula

400g/bag 01-28-2008 3200

Youth Calcium Rich Formula

400g/bag 04-05-2008 1783.29

Formula with Rich Iron and Zinc

400g/bag 06-12-2008 1201.56

Students Nutritional Formula

400g/bag 01-23-2008 968

Lady Calcium Rich Formula

400g/bag

05-11-2008

561.0

Pregnant Women Nutritional Formula

400g/bag 06-29-2008 287.75

Family Nutritional Formula

900g/can 09-02-2008 1.3

Full-cream Milk powder

25kg/bag 06-21-2008 2225.62

Full-cream Evaporated Milk Powder

25kg/bag 04-25-2008 145.82

Shijiazhuang Baocheng

Full-cream Milk Powder

25kg/bag Baocheng 06-16-2008 5577.29

Tangshan Longyuan

Full-cream Milk Powder

25kg/bag Longyuan 06-03-2008 5539.76

Nan Shan

Middle and Old Aged Milk with Higher Fiber and Rich Calcium

400g/bag

09-08-2008 5624

Middle and Old Aged Milk with Higher Fiber and Rich Calcium

900g/can 09-11-2008 3700

Middle and Old Aged Milk with Higher Fiber and Rich Calcium

400g/bag 06-23-2008 2200

Tangshan Longgang

Full-cream Milk Powder

25kg/bag Longgang 09-11-2008 710.17

Tangshan Mingle

Full-cream Milk Powder

25kg/bag Mingle 08-11-2008 354.60

Zhangbei Hongguan

Full-cream Milk Powder

25kg/bag Hongguan 08-01-2008 353.03

Chabei Milk Evaporated Milk Powder

300g/bag Chabei 09-11-2008 326.75

From official information available as of Tuesday 30th September http://www.aqsiq.gov.cn/zjxw/zjxw/zjftpxw/200809/t20080930_91891.htm

©Emerging Strategy Limited (www.emerging-strategy.com)

Emerging Strategy

Limited

Henan Jinyuan Full-cream Milk Powder

25kg/bag Jinyuan 18-03-2008 287

Brand Product Name Packaging Distinguishing Logo / Sample

Product Image

Production Date of Test

Sample

Melamine

(mg/kg）

Guangming

Aromatic Full-cream Milk Powder

400g/bag

07-09-2008 140

Guangdong Yashili

Special Formula for Primary and Middle School Student

400g/bag

07-15-2008 94.6

Special Formula for Ladies

400g/bag 06-03-2008 19.2

Youyi Special Formula for Ladies

400g/bag 07-09-2008 3.05

Tianjin Haihe

Full-cream Sweet Milk Powder

400g/bag

Haihe

08-17-2008 56.38

Fujian Fule Food

Rich Calcium Milk Powder for Middle and Old Aged

400g/bag Guige 06-04-2008 32

Yili

Fortified Vitamins & Hi-Calcium Milk Powder for Aged

400g/bag

05-05-2008

25.7

Fuzhou Mingyi Students Milk Powder

400g/bag Mingyi

08-03-2008 17

Sanyuan

Dry Milk

08-07-2008 10.58

©Emerging Strategy Limited (www.emerging-strategy.com)

Emerging Strategy

Limited

Mengniu

Fortified Vitamins & Hi-Calcium and Hi-Iron Milk Powder for Ladies

400g/bag

08-21-2008 6.0

Notes: – The information in the tables ‘Baby Milk Formula with Melamine’ and ‘Milk and Yogurt with

Melamine’ based on Chinese government sources published as of Wednesday 8th October 2008.

– This is a developing story and it is possible that additional brands and / or products may be later found to have contained Melamine

– The images under 'Distinguishing Logo / Sample Product Image' are not necessarily those of specific products that were found to contain Melamine. Since we were not necessarily able to obtain images of the tainted products, we decided to use representative images of products made by the brand in order to visually communicate the characteristic brand logo. Please refer to the "Product Name" and "Packaging" columns for product-specific information.

– Emerging Strategy takes no responsibility for the accuracy of this information. The information has been translated from Chinese, and it is possible that there may be some inaccuracies in the original Chinese or in the translation. This information is communicated for public interest / reference only.

– The information in the tables ‘Baby Milk Formula with Melamine’ and ‘Milk and Yogurt with Melamine’ may be distributed without Emerging Strategy's permission. However, we request that if you publish this information, please credit Emerging Strategy as the source.